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No.  104. 


AUSTRIAN  THEORY 


OF 


VALUE. 


BY 


S.  M.  Macvane, 

Harvard  University. 


A  PAPER  SUBMITTED  TO  THE 
AMERICAN  ACADEMY  OF  POLITICAL  AND  SOCIAL  SCIENCE 


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AUSTRIAN  THEORY  OF  VALUE. 


THE  AUSTRIAN  THEORY  OF  VALUE. 

In  an  article  headed  “  Boehm- Bawerk  on  Value  and 
Wages,”  published  in  the  Quarterly  Journal  of  Economics , 
October',  1890,  I  ventured  to  give  some  reasons  for  regarding 
the  marginal  utility  theory  of  value  as  insufficient  and 
unsound.  Professor  von  Wieser,  of  the  German  University 
of  Prague,  has  presented  a  paper  to  the  Academy,  containing 
a  defence  of  the  new  theory.*  In  part  his  paper  is  a  reply  to 
my  objections  ;  in  part  it  is  a  criticism  of  the  classical  theory. 
I  have  read  and  pondered  very  carefully  all  that  the  learned 
professor  has  so  skillfully  urged  in  behalf  of  the  new  doctrine  ; 
but  I  find  myself  wholly  unable  to  perceive  that,  here  or 
elsewhere,  a  good  case  has  been  made  out  for  it.  With  the 
kind  permission  of  the  editors  of  the  Annai<s,  I  propose  to 
review,  as  briefly  as  possible,  the  main  points  at  issue 
between  the  two  theories.  And,  before  entering  on  the 
subject,  I  wish  to  say  that  there  is  so  much  that  is  good 
and  admirable,  so  much  real  light  and  instruction,  to  be 
found  in  the  writings  of  the  Austrian  economists,  that  it 
would  be  a  much  more  agreeable  task  to  dwell  on  the  points 
in  which  I  am  in  full  agreement  with  them,  than  to  call 
attention  to  the  errors  into  which  they  seem  to  me  to  have 
fallen.  Further,  in  the  practical  outcome,  their  theories,  so 
far  as  I  see,  do  not  lead  to  results  that  conflict  with  those 
reached  by  the  classical  school.  While  differing  as  to  our 
modes  of  reasoning  and  our  ways  of  stating  our  conclusions, 
I  am  unable  to  perceive  that  the  Austrian  economists  differ 
in  substance  from  the  older  school  in  their  way  of  regarding 
the  practical  problems  that  vex  our  time.  Both  schools  are 
at  one  in  their  rejection  of  the  crude  and  shallow  vagaries 
that  have  been  advanced  from  so  many  quarters  of  late,  as 
new  economic  gospel.  While,  then,  we  argue  out,  frankly 
and  fully,  our  points  of  theoretic  divergence,  we  must  not 

*  Printed  in  the  Annals,  March,  1892. 

[348] 


The  Austrian  Theory  of  Vaeue.  13 

forget  our  substantial  agreement  as  to  those  weightier  matters 
which  make  economic  theory  worth  discussing  at  all.  I  am 
not  without  hope  that  the  Austrian  economists,  on  fuller 
consideration  of  the  whole  matter,  may  see  reason  to  modify 
their  present  view  as  to  the  influence  of  marginal  utility  in 
the  determination  of  value  ;  and  that  the  outcome  of  their 
brilliant  activity  may  prove  to  be,  even  in  their  own  judg¬ 
ment,  not  an  overturning  of  the  accepted  doctrine,  but  a 
needful  improvement  and  illumination  of  a  previously 
neglected  portion  of  it. 

The  points  in  controversy  between  the  Austrian  economists 
and  the  adherents  of  the  classical  school  are  reducible,  I 
think,  to  these  two  questions:  (1)  What  is  the  proper 
definition  of  cost  of  production  ?  (2)  How  shall  we  account 

for  the  observed  correspondence  between  cost  of  production 
and  exchange  value?  The  Austrian  economists  answer 
these  questions  in  a  new  way.  If  it  can  be  shown  that 
their  answers  do  not  bear  critical  examination,  we  shall 
have  made  a  long  step  toward  showing  that  the  principle 
of  marginal  utility  has  a  much  more  restricted  action  in 
relation  to  value  than  they  have  supposed.  The  questions 
involved  go  to  the  very  foundations  of  economic  theory,  and 
call  for  much  patient  reflection  on  the  part  of  readers  as  well 
as  writers.  Let  us  first  consider  the  question  of  the  true 
nature  and  necessary  elements  of  cost  of  production. 

I.  THE  CEASSICAE  VIEW  OF  COST. 

One  who  undertakes  to  defend  the  classical  conception  of 
cost  is  under  the  disadvantage  of  not  being  able  to  give  a 
definition  of  cost  that  can  claim  universal  acceptance  among 
classical  economists.  Dr.  von  Wieser  seems  to  imagine  that 
we  all  agree  with  Ricardo  in  reducing  cost,  in  the  final 
analysis,  to  labor  alone.  In  that  he  is,  of  course,  entirely 
mistaken.  We  are  practically  unanimous  in  holding  that 
economic  cost  includes  something  more  than  mere  labor. 
Rut  what  the  further  element  may  be,  how  to  name  it  and 

[349] 


14  Annaes  of  the  American  Academy. 

how  to  treat  it,  must  be  admitted  to  be  unsettled  questions 
among  us.  This  being  so,  it  must  be  understood  that,  in 
what  I  have  to  say  as  to  this  further  element,  I  cannot  lay 
claim  to  a  consensus  of  classical  authority  behind  me. 

There  are  obviously  two  ways  of  looking  at  cost.  We 
may  regard  productive  industry  from  the  standpoint  of  the 
employing  class,  and  think  of  cost  as  measured  by  their 
payments.  Or,  secondly,  we  may  think  of  the  whole  com¬ 
munity  as  exerting  itself  in  appropriate  ways  for  the  produc¬ 
tion  of  commodities,  and  may  think  of  these  necessary 
exertions  as  constituting  the  r  eal  cost  of  the  things  produced. 
The  first  of  these  views  we  may  call  the  employer’s  view 
of  cost ;  the  other  has  been  called  the  economic  or  scientific 
view.  The  first  step  toward  a  correct  conception  of  cost  is, 
in  my  opinion,  to  get  clear  ideas  as  to  the  difference  between 
these  two  views.  Some  discussion  of  the  matter  is  made 
necessary  in  the  present  case,  because  Dr.  von  Wieser  fails 
to  apprehend  the  classical  account  of  economic  cost,  and 
adopts,  on  his  own  part,  a  view  that  is  closely  allied  to,  if  not 
at  bottom  identical  with,  the  employer’s  conception  of  cost. 

The  employer  looks  on  cost  of  production  from  a  purely 
personal  standpoint.  For  him  cost  is  a  question  of  payments  : 
of  outlay  for  necessary  buildings,  machinery,  materials  and 
labor.  By  careful  book-keeping  he  can  tell  with  approximate 
accuracy  how  much  each  unit  of  product  costs  him.  With 
this  as  a  basis,  he  can  readily  tell  how  much  profit  can  be 
made  by  selling  his  product  at  any  given  price.  And  this, 
I  need  hardly  say,  is  his  primary  interest  in  the  whole 
question.  In  his  view  cost  is  lowered  quite  as  effectually 
by  a  fall  in  the  wages  of  his  laborers  as  by  an  improvement 
in  machinery,  or  the  discovery  of  more  prolific  sources  of 
materials.  Cost  is  raised,  in  his  estimation,  when  for  any 
cause  his  own  necessary  outlay  is  increased,  even  though 
the  whole  increase  go  merely  to  swell  the  rewards  of  others 
engaged,  equally  with  himself,  in  the  production  of  the 
commodity. 


[350] 


The  Austrian  Theory  of  Vaeue. 


15 


The  mass  of  mankind  has  clearly  an  interest  in  the  cost 
of  production  of  commodities  that  finds  little  recognition  in 
the  employer’s  way  of  looking  at  the  matter.  The  economic 
view  of  cost  must  recognize  this  interest.  It  can  do  so  only 
by  taking  the  broadly  human  point  of  view  :  by  ignoring 
the  division  of  men  into  employers  and  laborers,  and  making 
cost  of  production  a  question  of  the  whole  exertion  or  sacri¬ 
fice  men  have  to  undergo  in  order  to  produce  the  various 
commodities  they  need.  In  this  view  we  are  to  direct  our 
attention  solely  to  the  process  of  production  itself,  ignoring 
wholly  the  arrangements  men  have  made  between  themselves 
as  to  the  ownership  of  the  product  when  completed,  or  the 
individual  compensations  for  shares  borne  in  the  total  cost 
of  it.  We  are  to  have  no  thought  of  employers  as  such, 
but  only  of  the  labor  of  direction  and  oversight ;  no  thought 
of  hiring  and  wages,  but  only  of  laborers  exerting  them¬ 
selves  in  appropriate  ways  for  the  production  of  enjoyable 
commodities.  From  this  point  of  view  we  should  say  that 
anything  which  affects  the  ease  or  difficulty  of  the  whole 
task  of  producing  each  commodity,  affects  its  cost  of  produc¬ 
tion  ;  and  that  nothing  does  affect  the  cost  of  production, 
which  does  not  affect  the  ease  or  difficulty  of  the  whole  task. 

As  between  these  two  views  of  cost,  I  can  hardly  imagine 
an  economist  hesitating  in  his  choice.  The  one  is  limited 
and  artificial.  It  seems  to  regard  production  as,  primarily, 
a  field  for  making  profits.  Further,  as  the  individual  erm 
ployer  commonly  manages  but  one  stage  in  the  whole  pro¬ 
cess  of  producing  each  commodity,  this  view  has  the  defect 
of  not  taking  the  whole  process  into  account  in  considering 
the  cost  of  production.  The  other  view  is  as  broad  as 
production  itself.  It  brings  us  face  to  face  with  the  original 
elements  of  cost  in  the  very  nature  of  the  productive  process. 
This,  it  is  needless  to  remark,  is  a  point  of  no  small  import¬ 
ance  for  scientific  purposes.  If  we  accept  the  employer’s 
view  of  cost,  we  rest  on  payments  between  man  and  man, 
which  doubtless  have  reference  to  share?  borne  in  the 

[351] 


1 6  Annals  of  the  American  Academy. 

natural  cost  of  production,  but  are  at  best  only  business 
valuations  of  this  or  that  fraction  of  the  natural  cost.  If, 
on  the  other  hand,  we  base  our  theory  of  cost  on  the  diffi¬ 
culties  of  the  productive  process  in  itself,  we  are  in  no 
danger  of  finding  that  our  assumed  elements  of  cost  are,  in 
fact,  resolvable  into  more  simple  and  fundamental  elements 
back  of  them. 

What,  then,  are  the  ultimate  elements  of  the  natural  cost 
of  producing  commodities  ?  All  agree,  I  think,  in  regarding 
the  necessary  labor  of  all  sorts  as  the  chief  element ;  though, 
as  we  shall  see  presently,  the  Austrian  economists  ask  us  to 
count,  not  the  labor  itself,  but  the  “  value  ”  of  it,  as  a  con¬ 
stituent  of  cost.  English  and  American  economists,  so  far 
as  I  am  acquainted  with  their  views,  differ  only  as  to  the 
range  or  extension  to  be  given  to  the  term  labor  as  an 
element  in  the  cost  of  each  commodity.  Some  of  them 
seem  to  have  in  mind  only  the  labor  applied  at  the  last  stage 
of  the  process  in  each  case.  When,  for  example,  they  speak 
of  labor  as  an  element  in  the  cost  of  production  of  coats, 
they  seem  to  think  only  of  the  tailor’s  labor,  and  perhaps 
of  the  weaver’s  also.  But  it  is  difficult  to  see  how  such  a 
limitation  of  the  term  is  to  be  justified.  Certainly,  if  we 
look  at  the  nature  of  production  as  a  whole,  we  shall  find 
no  reason  for  making  any  difference,  in  this  regard,  between 
the  labor  of  the  tailor  and  that  of  the  spinner,  or  of  the 
dyer,  or  of  the  wool-grower.  Unless  we  are  prepared  to 
say  that  coats  can  be  made  without  wool,  and  without 
woolen  yarn,  we  are  in  all  reason  bound  to  include  all  these 
labors  as  parts  of  the  labor  of  producing  coats.  Nor  is  this 
all.  Unless  we  are  prepared  to  say  that  wool  can  be  spun 
into  yarn  without  spinning  machines,  and  that  yarn  can  be 
woven  into  cloth  without  looms,  wre  are  equally  bound  in 
reason  to  include  in  the  labor  of  producing  coats  the  labor 
of  providing  requisite  machinery  for  carrying  on  the  various 
parts  or  stages  of  the  whole  process.  What  good  reason  can 
be  given  for  stopping  short  at  any  point  in  the  whole  process, 

[352] 


The:  Austrian  Theory  of  Value. 


17 


or  for  excluding  from  our  definition  of  cost  any  part  of  the 
labor  that  contributes,  directly  or  indirectly,  to  the  final 
enjoyable  commodity,  a  coat?  The  fear  that  we  may  seem 
to  say  that  labor  is  the  sole  element  of  cost,  and  may  thereby 
concede  a  dangerous  advantage  to  the  disciples  of  Karl 
Marx  ?  Surely  not.  Science  can  have  no  fears ;  must 
accept  all  the  facts  just  as  it  finds  them.  L,et  us,  then, 
when  we  name  labor  as  an  element  in  the  cost  of  production 
of  any  commodity,  admit  freely  the  whole  labor  of  all  sorts 
from  beginning  to  end. 

If,  then,  we  use  the  word  labor  in  our  definition  of  cost, 
understanding  it  to  include  all  the  labor,  wdiat  further  burden 
or  sacrifice  is  there  that  men  have  to  undergo  in  the  produc¬ 
tion  of  enjoyable  commodities?  All  reasonable  men  perceive 
that  there  is  a  further  element ;  the  difficulty  is  to  agree  as  to 
its  precise  nature.  The  more  common  practice  of  English 
and  American  economists,  in  recent  years,  has  been  to  regard 
the  abstinence  of  the  capitalists  as  the  other  element.  I  have 
elsewhere  given  some  reasons  for  thinking  this  practice  to  be 
inadmissible.*  As  Dr.  von  Wieser  seems  to  agree  with  me 
in  rejecting  abstinence  as  an  element  in  cost,  I  need  not  here 
repeat  those  reasons.  If  we  only  look  at  the  processes  of 
production  as  they  go  forward,  we  can  hardly  fail  to  recognize 
the  missing  factor  in  cost.  The  whole  process  of  producing 
nearly  every  enjoyable  commodity  is  very  far  from  being  a 
single  and  simple  exertion  of  labor.  It  is,  in  most  cases,  a 
series  of  operations,  necessarily  extending  over  a  considerable 
stretch  of  time.  Partly,  this  is  due  to  nature’s  way  of  doing 
her  share  of  the  work  ;  she  takes  time  to  mature  the  fruits 
of  human  labor.  Not  all  the  men  in  Europe  could  produce 
a  grain  of  wheat,  or  a  quarter  of  beef,  or  a  pound  of  wool, 
by  a  month  of  assiduous  labor :  nature  has  her  own  way  of 
yielding  such  things,  and  it  is  a  way  that  takes  time.  In 
part,  also,  the  delays  of  production  are  due  to  men’s  own 

*  Quarterly  Journal  of  Economics,  July,  1887  ;  also  iu  my  “  Working  Principles/’ 
P-  387. 

[353] 


1 8  Annals  of  the  American  Academy. 

need  of  time  for  doing  their  share  of  the  work  ;  very  largely 
they  are  due  to  the  fact  that  so  great  a  proportion  of  the 
whole  labor  of  producing  things  has  to  be  applied  to  the  pre¬ 
paration  of  the  natural  agents,  to  the  erection  of  necessary 
buildings,  the  making  of  requisite  machinery,  etc.  It  is 
patent  on  the  very  face  of  things  that  the  industrial  system  of 
a  civilized  country  represents  an  enormous  mass  of  labor 
already  expended,  which  has  not  yet  produced  its  full  enjoya¬ 
ble  result.  It  is  equally  clear  that  the  maintenance  of  such 
a  system  requires  every  day  the  expenditure  of  great  quanti¬ 
ties  of  labor  in  ways  which,  by  the  nature  of  the  case,  must 
be  long  in  yielding  enjoyable  returns. 

Now,  if  men  wTere  quite  indifferent  whether  they  got  the 
enjoy able"products  of  their  labor  to-day  or  years  hence,  this 
need  of  time  in  production  would  not  be  burdensome  ;  the 
whole  natural  cost  of  production  would  then  consist  of  labor 
alone.  But  human  beings  are  very  far  indeed  from  being 
thus  indifferent.  So  far  as  the  necessities  of  life  are  con¬ 
cerned,  of  course  delay  is  impossible  :  actual  wants  must  be 
supplied  now.  But  when  actual  necessities  are  provided  for, 
desires  for  material  comforts,  almost  as  urgent  as  absolute 
wants,  clamor  for  immediate  satisfaction.  This  human  im¬ 
patience  for  speedy  enjoyment  of  good  things  makes  the 
necessary  slowness  of  production  a  burdensome  feature 
of  it.  Indeed  most  men  seem  to  shrink  from  the  necessary 
waiting  even  more  than  from  necessary  labor  itself.  They 
are  ready  enough  to  work  for  immediate  returns,  but  the 
distant  natural  return  for  productive  labor  fails  to  attract 
them.  They  are  not  willing  “  to  labor  and  to  wait.” 

These  two  sacrifices,  that  of  labor  and  that  of  waiting,  seem 
therefore  to  stand  on  the  same  level  as  elements  of  cost  of 
production.  They  are  both  demanded  by  the  very  nature  of 
production  and  the  physical  laws  under  which  it  must  be 
carried  on.  They  are  both  simple  and  primary  sacrifices,  not 
in  the  least  due  to  any  merely  business  arrangements  between 
men,  nor  can  they  be  evaded  by  any  human  contrivance. 

[354] 


The  Austrian  Theory  of  Value. 


19 


Further,  I  think  it  is  easily  demonstrable  that,  taken 
together,  these  two  sacrifices  constitute  the  whole  cost  of 
producing  commodities.  It  could  be  shown  by  experiment 
if  need  be.  Given  men  who  have  the  requisite  knowledge, 
the  requisite  idea,  production  of  all  sorts  is  possible  for  them, 
if  only  they  are  ready  to  work,  and  to  wait  for  the  natural 
product  of  their  work  until  the  process  of  production  yields 
it.  Nothing  more  is  needed,  because  nature’s  terms  demand 
nothing  more.  If  this  be  true,  are  we  not  justified  in  saying 
that  the  original  and  ultimate  elements  of  cost  of  production 
are  labor  and  waiting  ?  * 

The  relation  of  natural  cost  to  employer’s  cost  must  be 
obvious  to  every  one  who  bears  in  mind  the  feature  of  modern 
industry  that  goes  under  the  name  of  ‘  ‘  combination  ’  ’  of 
labor.  In  truth  the  whole  industrial  system  is  a  scheme  of 
combination  of  labor.  Nearly  every  commodity  is  a  product 
of  many  different  kinds  of  labor,  combined  and  converging 
toward  the  final  enjoyable  result.  The  employer  who  stands 
at  the  closing  stage,  and  is  to  own  the  commodity  when  com¬ 
pleted,  must  of  course  pay  for  the  labor  and  waiting  that  have 
already  been  devoted  toward  obtaining  the  product.  This 
he  does  in  the  form  of  buying  materials  and  machinery.  The 
price  he  pays  stands  to  him  as  cost.  But  it  is  a  cost  of  acquisi¬ 
tion,  not  the  natural  cost  of  producing  the  things  bought. 
Strictly,  the  cost  to  him  is  the  labor  and  waiting  he  spent  for 
the  thing  he  gives  in  exchange.  The  true  cost  of  production 
of  the  commodity  he  is  himself  engaged  upon,  is  the  sum 
total  of  the  various  bits  of  labor  and  waiting  contributed  by 
all  the  persons  who  take  part,  directly  or  indirectly,  in  the 
production  of  it.  The  arrangements  and  payments  these 
persons  make  among  themselves  in  consideration  of  the  part 
each  bears  in  the  whole  burden,  do  not  affect  the  nature 
of  the  burden  itself.  That  remains,  through  all  their 

*  Dr.  von  Wieser  assumes  throughout  his  paper  that  I  reduce  cost  of  production 
to  labor  alone.  1  hope  that  what  is  said  above  will  make  clear  to  him  that  he  has 
misunderstood  me  in  this  respect. 


L355] 


20 


Annals  of  the  American  Academy. 


arrangements,  the  two- fold  task  of  necessary  labor,  followed 
by  necessary  waiting. 

These  considerations  help  us  to  see  the  exact  function  of 
abstinence  in  relation  to  production.  The  abstinence  of 
capitalists  comes  into  play  to  provide  savings  wherewith  to 
pay  wages,  in  advance  of  the  natural  yield  of  labor,  to  those 
who  are  unable  or  unwilling  to  submit  to  the  long  waiting 
demanded  by  the  nature  of  production.  Since  wages  are  no 
part  of  the  true  cost  of  production,  neither  is  abstinence  ;  for 
abstinence  has  no  function  except  to  supply  the  means  of  pay¬ 
ing  producers  in  advance  of  the  natural  rewards  of  their 
exertions. 

II.  THE  AUSTRIAN  VIEW  OF  COST. 

The  Austrian  economists  seem  to  me  to  have  made,  as  yet, 
no  serious  or  systematic  study  of  cost  of  production.  It  was 
hardly  in  the  nature  of  things  that  they  should  do  so. 
Classical  economists  dwell  on  cost  because  their  whole  sys¬ 
tem  rests  on  it.  But  with  the  Austrians  the  case  is  different. 
They  have  no  use  for  the  doctrine  of  cost.  They  had 
indeed  to  find  room  for  it  in  their  system,  because  it  could 
not  be  wholly  ignored  ;  but  it  seems  to  hold  there  the  posi¬ 
tion  rather  of  a  foreign  substance  than  of  an  essential  ele¬ 
ment  in  the  fabric.  Dr.  Karl  Menger,  the  pioneer  and 
acknowledged  leader  of  the  school,  has  not  yet,  so  far  as  I 
am  aware,  incorporated  any  doctrine  of  cost  into  his  treat¬ 
ment  of  value.  Dr.  von  Boehm- Bawerk,  and  those  other 
members  of  the  school  who  discuss  the  action  of  cost,  assign 
to  it  a  very  subordinate  place.  They  admit  the  tendency  of 
value  to  conform  to  cost,  but  explain  this  tendency  as  merely 
“  a  special  case  within  the  great  law  of  marginal  utility.” 
A  law  of  costs,  as  an  independent  and  controlling  principle, 
they  do  not  seem  to  admit.  Marginal  utility  they  hold  to 
be  the  primary  and  universal  law  governing  the  value  of 
all  valuable  things.  Their  only  concern  with  cost  is  to 
reconcile  it  with  this  other  and  greater  law.  If,  now,  it 
can  be  shown  that  they  have  thus  far  failed  in  effecting  this 

[356] 


The  Austrian  Theory  of  Vaeue. 


21 


reconciliation,  we  shall  have  good  reason  for  doubting  the 
validity  of  their  claims  on  behalf  of  marginal  utility.  That 
this  can  be  shown  I  have  no  doubt,  because  it  seems  clear 
that  cost,  as  they  treat  it,  is  not  true  cost  at  all. 

Their  definition  of  cost,  to  begin  with,  involves  their 
theory  of  value.  The  cost  of  every  commodity  consists  of 
the  ‘  ‘  value  of  the  means  of  production  ’  ’  used  up  in  produc¬ 
ing  it.  By  means  of  production,  according  to  Dr.  von 
Wieser,  we  are  to  understand  such  things  as  ‘  ‘  common 
hand-labor,  coal,  wood,  the  commonest  metals;”  also  land 
of  the  ordinary  sort.  Observe  that,  in  his  view,  human 
labor  is  not  in  itself  an  element  of  cost ;  it  is  only  its  value 
that  constitutes  cost.  But  since,  according  to  the  Austrian 
theory,  value  is  simply  another  word  for  marginal  utility, 
and  since  mere  means  of  production,  such  as  labor,  coal, 
iron,  etc.,  have  no  direct  utility  of  their  own,  they  have  no 
value  of  their  own.  They  can  be  used,  however,  to  produce 
useful  commodities ;  they  have,  therefore,  a  derived  or 
‘  ‘  attributed  ’  ’  utility  equal  to  that  of  their  potential  pro¬ 
ducts.  The  value  thus  acquired  by  the  means  of  production 
constitutes  and  measures  the  cost  of  the  commodities  they 
are  used  to  produce.  For  production  does  not  merely  create 
value  ;  it  also  destroys  value.*  The  elementary  means  of 
production,  such  as  iron,  coal,  wood  and  common  labor, 
have  manifold  uses.  When  any  part  of  the  general  stock  of 
them  is  applied  to  the  production  of  any  given  article,  as,  for 
example,  a  kitchen  range,  the  same  part  cannot  be  again 
used  for  producing  nails  or  horseshoes  or  iron  palings. 
Thus,  “each  productive  process  costs ,  and  it  costs  exactly 
as  much  as  the  value  which  the  material  and  labor  required 
would  have  produced  if  rationally  applied.  ”f 

This  view  of  cost  seems  to  me  to  be  radically  insufficient. 
It  seems  to  say  that  the  cost  to  us  of  what  we  produce  is  the 
loss  of  what  we  might  have  produced  instead  of  it ;  that  the 

*  Von  Wieser,  “  Der  naturliche  Werth p.  167. 

f  Von  Wieser,  “Theory  of  Value,”  Annals,  Vol.  ii,  p.  618,  March,  1892. 

[357] 


22 


Annals  of  the  American  Academy. 


cost  of  the  kitchen  range  consists  in  the  lost  value  of  the 
nails,  horseshoes  and  palings  we  might  have  produced  with 
the  labor  and  materials  that  have  been  put  into  the  range. 
That  way  of  looking  at  cost  seems  to  me  to  verge  on  the 
fanciful ;  to  be,  at  all  events,  lacking  in  the  simplicity  and 
directness  that  ought  to  characterize  a  scientific  definition. 
It  has,  however,  other  defects  that  are  more  serious.  It  has, 
in  the  first  place,  all  the  defects  of  the  employer’s  view  of 
cost.  It  asks  us  to  forget  those  features  of  production  that 
men  necessarily  feel  as  burdensome  and  costly.  The  irk¬ 
some  human  exertions  necessary  to  the  production  of  kitchen 
ranges  are  not  to  be  thought  of  as  elements  of  cost.  It  is 
only  the  attributed  value  of  those  exertions  that  is  to  be 
taken  into  account.  But  the  value  of  human  labor,  as  the 
Austrians  expound  it,  is  simply  the  value  of  its  potential 
product.  Putting  their  two  propositions  together,  we  have 
the  unavoidable  result  that  the  cost  of  commodities,  as  they 
explain  it,  is  simply  another  word  for  the  value  of  commodi¬ 
ties.  Cost  and  value,  as  they  treat  them,  become  indis¬ 
tinguishable.  They  set  out  with  a  value  for  each  commodity 
fixed  by  marginal  utility.  The  value  so  fixed  for  the  com- 
modity,  or  for  the  marginal  member  of  each  related  group 
of  commodities,  fixes  the  value  of  the  means  requisite  for 
producing  the  commodity.  The  value  of  the  means  consti¬ 
tutes,  in  turn,  the  cost  of  the  commodity.  But,  in  this 
circling  and  doubling,  we  obviously  do  not  get  beyond  value 
— do  not  touch  true  cost  at  all.  We  deal  only  with  the 
relations  between  wages,  the  values  of  machinery,  partly 
wrought  materials,  etc.,  and  the  value  of  the  completed 
product.  All  that  the  Austrian  economists  have  urged  as 
to  these  relations  may  be  both  true  and  important  in  its 
proper  place.  But  it  seems  to  me  clear  that  no  part  of 
it  can  be  received  as  reaching  the  subject  of  economic 
cost.  Value  may  be  a  consequence  and  an  evidence  of 
cost  of  production ;  it  can  never  be  itself  true  cost  to  the 
producer. 


[358] 


The  Austrian  Theory  of  Vaeue. 


23 


We  have  only  to  consider  the  case  a  little  to  perceive  the 
incongruity  of  the  Austrian  doctrine.  The  value  of  iron, 
for  example,  according  to  their  view,  is  not  only  due  to  its 
fitness  for  making  iron  wares,  but  is  fixed  by  the  value  of 
those  wares  (or  of  the  marginal  member  or  portion  of  them). 
Yet,  when  we  proceed  to  develop  this  value  of  iron,  by 
appfying  it  to  any  of  the  uses  which  give  it  value,  its  value 
is  at  once  transformed  into  cost.  Iron  has  value,  because  it 
can  be  turned  into  ranges,  nails,  and  ten  thousand  other 
things ;  but  iron  wares  cost,  because  iron  is  valuable  for 
making  them.  This  seems  a  strange  conception  of  cost.  If 
we  put  it  in  another  form,  its  strangeness  becomes  even  more 
striking.  Dr.  von  Wieser  tells  us  that  “cost  is  .  .  . 

measured  by  utility  alone.”  That  is  to  say,  iron  wares  have 
utility  for  us  ;  and  iron,  as  a  material  for  making  them,  has 
a  derived  or  attributed  utility  equal  to  that  of  its  potential 
products.  But  when  we  proceed  to  avail  ourselves  of  this 
utility  of  iron,  by  actually  converting  it  into  any  of  the  useful 
articles  for  the  making  of  wdiich  it  is  so  well  adapted,  its  very 
suitableness  for  our  purpose  becomes  an  item  of  cost  to  us. 
Its  utility  is  at  once  advantageous  and  burdensome  to  us  ; 
burdensome  and  costly  precisely  because,  and  precisely  so 
far  as,  it  is  advantageous  to  us. 

Probably,  Dr.  von  Wieser,  seems  to  himself  not  to  have 
maintained  any  such  absurdity  as  this.  In  fact,  he  gives  no 
sign  of  having  considered  cost  in  the  general  sense  at  all. 
His  sole  interest  in  cost  is  limited  to  the  obvious  necessity  of 
establishing  a  modus  vivendi  of  some  sort  between  it  and 
marginal  utility  ;  and,  he  seems  to  have  too  easily  concluded 
that  he  had  sufficiently  dealt  with  cost  when  he  had  devised 
a  treatment  which  applies,  with  an  appearance  of  logical 
consistency,  to  the  comparative  costs  of  the  various  commod¬ 
ities  to  the  employers.  Cost,  as  he  treats  it,  is  made  up  of  the 
value  of  those  means  of  production  that  have  manifold  appli¬ 
cations,  such  as  iron,  coal  and  common  labor.  The  import¬ 
ance  of  manifold  applicability  as  a  quality  of  ‘  ‘  cost-goods  ’  ’ 

[359] 


24 


Annals  of  the  American  Academy. 


is  readily  seen.  Dr.  von  Wieser  evidently  perceived  the 
incongruity  of  asserting  that  the  utility  of  iron  for  the 
making  of  nails,  can  be  an  item  in  the  cost  of  production  of 
nails.  In  his  book  on  “Natural  Value”  (p.  168),  he 
expressly  guards  himself  against  seeming  to  maintain  this, 
by  explaining  that  the  value  of  any  material  which  has  but 
a  single  use,  does  not  enter  into  the  cost  of  the  resulting 
commodity.  The  value  of  the  commodity  is  indeed,  here  as 
in  other  cases,  carried  back  by  attribution  to  the  means  of 
producing  it ;  but  the  value  of  the  means  does  not,  in  this 
case,  hold  the  relation  of  cost  to  the  commodity.  Here  at 
least  we  can  wholly  agree  with  him.  The  strange  thing  is 
that  his  conclusion  as  to  this  case,  had  not  led  him  to 
question  the  validity  of  his  reasoning  in  the  case  of  materials 
having  manifold  applications  ;  had  not  raised  a  doubt  in  his 
mind  whether  utility  can  be  in  any  case  a  true  element  of 
cost. 

For  how,  on  his  system,  does  he  wish  us  to  conceive  the 
cost  of  the  whole  group  of  related  commodities,  in  the 
production  of  which  any  given  material  of  manifold  applica¬ 
tion  comes  into  play  ?  When  he  speaks  of  the  value  of  iron 
as  an  item  in  the  cost  of  production  of  nails,  he  asks  us  to 
think  of  the  utility  of  iron  for  the  production  of  axes,  ranges, 
pots,  and  the  many  other  iron  wares.  If  the  cost  of  pro¬ 
duction  of  axes  be  in  question,  we  are  to  think  of  the 
utility  of  the  requisite  iron  for  the  making  of  nails,  etc. 
But  how  of  the  cost  of  axes  a?id  nails,  and  all  the  other  iron 
products  ?  He  will  not,  I  suppose,  deny  the  existence  of 
cost  in  this  general  sense  for  all  iron  wares.  How  would  he 
have  us  express  it?  What  are  its  elements?  Is  it  not 
obvious  that  the  utility  of  iron  holds  to  the  whole  group  of 
iron  products,  precisely  the  same  relation  that  the  utility  of 
the  single-use  material  holds  to  the  single  resulting  commo¬ 
dity  ?  Is  there  not,  therefore,  the  same  fundamental  objection 
to  counting  the  utility  of  iron  as  an  item  in  the  cost  of  nails, 
as  there  is  to  counting  the  utility  of  Johannisberger  grapes 

[360] 


The  Austrian  Theory  oe  Value.  25 

in  the  cost  of  Johannisberger  wine  ?  Can  utility  be  cost  in 
any  case,  if  we  are  to  regard  cost  as  something  burdensome, 
and  not  merely  as  a  blessing  under  a  wrong  name?  It 
seems  to  me  clear  that  it  cannot  be,  and  that  Dr.  von 
Wieser’s  effort  to  reconcile  the  marginal  utility  theory  of 
value  with  the  observed  tendency  of  cost  to  control  value, 
has  fallen  a  good  way  short  of  success. 

There  are  other  features  of  his  treatment  that  seem  equally 
objectionable.  Why,  for  example,  does  he  ask  us  to  begin 
our  computation  of  cost  with  the  value  of  coal,  iron,  wood, 
etc.  ?  Coal  in  its  native  seam  has  no  value ;  neither  has 
iron  in  its  original  beds  of  ore.  Nature  does  not  give  us 
coal  in  the  furnace-room,  nor  iron  in  the  form  of  pigs, 
nor  wood  dried  and  ready  for  the  hand  of  the  joiner.  But 
neither  does  she  hold  her  supplies  of  any  material  at  a  value 
against  us.  Men  can  have  every  material  freely  for  the 
mere  trouble  of  taking  it.  I  cannot  but  regard  it  as  a  grave 
defect  in  Dr.  von  Wieser’s  treatment,  that  he  does  not  begin 
his  computation  of  cost  at  the  beginning  of  each  process  of 
production.  He  seems  to  say  that  the  labor  of  mining  and 
smelting  iron  ores  is  no  part  of  the  process  of  producing  iron 
wares.  He  takes  up  the  reckoning  of  cost  of  iron  products, 
when  the  process  of  producing  them  is  already  well  advanced. 
What  sound  reason  is  there  for  throwing  out  of  account  the 
earlier  labors  in  each  process?  Are  they  not  a  true  and 
essential  part  of  the  process,  entitled  in  every  way  to  as  full 
recognition  as  the  labors  of  the  later  stages  ?  Dr.  von  Wieser 
may  perhaps  have  held  that  he  gives  those  earlier  labors 
sufficient  recognition  as  elements  of  cost,  when  he  includes 
the  value  of  the  materials  they  have  produced.  Here,  how¬ 
ever,  we  meet  again  the  difficulty  already  pointed  out ; 
namely  that  value  and  cost  are  not  interchangeable  terms. 
If  it  be  allowable  to  blot  out,  in  our  computation  of  cost, 
any  part  of  the  exertions  by  which  commodities  are  pro¬ 
duced,  substituting  in  their  place  the  value  of  the  materials 
or  machinery  they  have  prepared,  then  I  see  no  good  reason 


26 


Annals  of  the  American  Academy. 


for  stopping  short  in  the  substitution  at  the  point  selected  by 
Dr.  von  Wieser.  If  it  be  legitimate  to  do  it  at  all,  there  can 
be  no  valid  reason  for  not  carrying  it  out  to  the  end, 
and  dropping  labor  and  waiting  out  of  the  account  alto¬ 
gether.  Indeed,  on  Dr.  von  Wieser’s  method  I  think  it 
would  not  greatly  matter.  If  the  element  of  cost  be  not  the 
labor  itself,  but  the  value  of  it,  or  the  value  of  the  other 
thing  or  things  it  might  have  produced,  then  it  does  not 
seem  to  matter  which  course,  or  what  combination  of  both 
courses,  we  choose  to  follow.  Either  proceeding  robs  cost 
of  all  independent  significance  ;  turns  it  into  a  mere  reflec¬ 
tion  of  value,  and  reduces  cost  in  the  general  sense  to  a  mere 
empty  phrase. 

This  last  consideration,  even  if  there  were  no  other  objec¬ 
tion  to  Dr.  von  Wieser’s  method  seems  to  me  decisive 
against  it.  On  his  plan  it  becomes  impossible  to  estimate 
cost  of  production  in  the  broad  sense  in  which  it  is  connected 
with  human  welfare  and  progress.  The  reduction  of  cost 
that  has  been  effected  by  general  improvements  in  the  arts 
of  production,  finds  neither  expression  nor  recognition  in 
his  vocabulary.  How,  for  example,  does  he  propose  to 
express  the  fact  that  all  commodities  are  lower  in  cost  to-day 
than  they  were  a  century  ago  ?  He  cannot  say  that  men 
get  commodities  with  less  labor  now  than  they  did  then,  and 
therefore  cost  has  been  reduced ;  for  he  makes  the  ‘  ‘  value 
of  labor”  the  constituent  of  cost,  and  the  value  of  labor 
has  risen  as  its  product  has  increased.  On  reflection  he 
must  perceive,  I  think,  that  his  procedure  fails  to  recognize 
cost  in  its  true  form.  What  he  has  chosen  to  dignify  with 
the  name  of  cost  of  production  is  in  reality,  on  the  most 
favorable  interpretation,  only  a  sort  of  disguised  form  of  em¬ 
ployer’s  cost.  At  best  it  can  give  but  a  clue  to  the  present 
comparative  costs  of  the  various  commodities  to  the  employers 
who  carry  on  the  final  stage  in  each  productive  process. 
What  these  pay  out  for  labor,  materials  and  machinery,  has 
indeed  reference  to  costs  endured  by  those  to  whom  the 

[362] 


The  Austrian  Theory  of  Vaeue. 


27 


payments  are  made  ;  but  to  confound  these  payments  with  the 
true  elements  of  cost  which  they  reward,  is  in  my  judgment, 
only  to  introduce  confusion  into  the  very  heart  of  our  science. 

Professor  von  Wieser  thinks  it  a  fatal  defect  in  the  classi¬ 
cal  treatment  of  cost  that  it  makes  no  mention  of  capital,  or 
the  consumption  of  capital  as  an  item  of  cost  distinct  from 
the  requisite  labor  and  waiting  (or  abstinence) .  He  argues 
that,  since  we  have  the  use  of  old  capital  even  in  procuring 
the  materials  wherewith  to  make  new  capital,  we  cannot 
eliminate  the  factor  ‘  ‘  capital  ’  ’  from  the  computation  of  cost. 
But  I  fail  to  see  the  force  of  his  objection.  Classical  econ¬ 
omists  agree  in  regarding  the  cost  of  capital  as  a  part  of  the 
cost  of  the  commodities  it  helps  to  produce.  Dr.  von  Wieser, 
I  venture  to  believe,  will  not  contend  that  this  is  an  erroneous 
proceeding.  The  only  question,  then,  is  as  to  the  proper 
mode  of  including  this  portion  of  the  total  cost  of  commodi¬ 
ties.  Dr.  von  Wieser  would  have  us  mention  it  specifically 
as  an  item  of  cost  different  from,  and  in  addition  to,  the 
requisite  labor  and  waiting.  A  little  reflection  will  convince 
him,  I  think,  that  there  are  decisive  reasons  against  that 
course.  When  the  classical  economist  has  named  the  neces¬ 
sary  labor  as  an  element  of  cost,  he  is  bound  to  include  all 
the  necessary  labor  from  the  beginning  to  the  end  of  the 
productive  process.  Now  the  requisite  capital  being  itself 
produced  by  labor,  and  this  labor  being  already  included  in 
our  definition  under  its  own  proper  name  of  necessary  labor, 
we  would  be  guilty  of  double  counting  if  we  named  the  capi¬ 
tal  also  as  an  element  of  cost,  over  and  above  the  necessary 
labor.  That  seems  conclusive  against  Dr.  von  Wieser’ s 
proposition.  Further,  if  we  introduce  capital  as  a  special 
item  of  cost,  there  is  really  no  natural  limit  to  the  application 
of  the  principle,  short  of  the  whole  cost  of  things.  For  is 
not  every  part  and  stage  of  every  productive  process  a  use, 
a  consumption,  of  capital  ?  Is  not  every  device  of  production, 
and  exchange,  every  material,  every  half- wrought  product — 
is  not  even  every  finished  commodity  while  still  in  the  course 

[363] 


28 


Annals  of  the  American  Academy. 


of  transportation  and  exchange — capital  ?  If  so,  how  can 
we  possibly  speak  of  the  use  of  capital  as  an  item  of  cost 
distinct  from,  and  in  addition  to,  the  necessary  labor  and  wait¬ 
ing  of  production  ?  Is  not  capital  the  very  product  and  neces¬ 
sary  result  of  the  labor  and  waiting  ?  Is  it  not  the  mark  and 
interim  pledge  of  the  coming  enjoyable  return  for  labor  ex¬ 
pended  ?  Do  not  the  Austrian  economists  themselves  treat 
it  so?  How  then,  I  repeat,  shall  we  escape  mere  absurdity, 
if,  in  spite  of  all  that,  we  set  down  capital  as  an  independent 
item  of  cost,  as  if  it  somehow  included  something  that  has 
not  been  produced  by  human  labor  and  waiting  ? 

Dr.  von  Wieser  apparently  thinks  the  classical  definition 
of  cost  requires  that  the  capital  now  in  use  should  have  been 
produced  by  the  men  of  to-day  without  the  aid  of  previous 
capital.  This  is  a  misapprehension  of  the  definition,  since 
those  who  hold  it  have  never  so  understood  it.  If  it  be 
granted  that  all  capital,  whether  new  or  old,  is  a  product  of 
human  industry,  the  definition  carries  its  own  justification. 
The  capital  now  in  use  is  undoubtedly,  to  a  large  extent,  a 
product  of  the  labors  and  waitings  of  past  generations  of 
men  ;  but  it  is  none  the  less  a  product  of  labor  and  waiting. 
No  sane  person  contends  that  those  who  provide  capital  are 
always  those  who  enjoy  the  resulting  product  or  even  the 
greater  part  of  it.  Each  successive  generation  has  the  enjoy¬ 
ment  of  commodities  whose  cost  was  largely  borne  by  pre¬ 
ceding  generations  ;  and,  in  its  turn,  it  expends  much  of  its 
own  labor  in  ways  that  yield  their  chief  returns  to  a  succeed¬ 
ing  generation.  But  these  facts,  so  far  from  being  in  conflict 
with  the  classical  definition  of  cost,  seem  only  to  supply  an 
illustration  of  its  main  principle.  Dr.  von  Wieser’s  difficulty 
is  probably  due  to  his  assuming  that  classical  economists 
reduce  cost  to  labor  alone. 

The  fact  that  the  existing  capital  is  largely  a  legacy  from 
past  times,  has,  I  think,  no  other  bearing  on  the  relation  of 
capital  to  cost  than  that  here  indicated.  Capital  being  in  all 
cases  merely  the  result  of  labor  applied  to  production  in 

[364] 


The:  Austrian  Theory  of  Vaeue. 


29 


certain  ways,  it  cannot  be  a  new  element  of  cost  different  from 
the  labor  and  waiting  that  produced  it.  The  legacy  feature 
of  the  case  has  undoubtedly  great  importance  in  other  ways  ; 
but  it  has  nothing  to  do  with  the  agency  of  capital  in  dimin¬ 
ishing  cost,  nor  with  the  nature  of  the  cost  of  capital  itself. 
Its  importance  lies  in  the  field  of  so-called  distribution. 
Though  all  men  are  enormously  benefited  by  the  legacy  of 
capital,  the  benefits  are  not  equal  to  all.  Those  to  whom  the 
ownership  has  come,  besides  sharing  the  common  benefit  of 
reduced  cost  of  commodities,  have,  by  virtue  of  their  owner¬ 
ship  of  the  capital,  a  lien  on  the  products  of  the  general 
industry.  This  seems  to  me  to  be  the  only  important  conse¬ 
quence  of  the  history  of  capital.  But  the  ownership  of  the 
industrial  outfit  has  obviously  nothing  to  do  with  its  influ¬ 
ence  in  making  industry  productive,  and  so  it  has  nothing  to 
do  with  cost  of  production.  It  affects  the  “sharing,”  not 
the  production,  of  commodities. 

For  these  reasons  I  cannot  but  hold  that  Dr.  von  Wieser’s 
criticism  of  the  classical  doctrine  of  cost,  like  his  defence  of 
the  Austrian  substitute  for  that  doctrine,  is  lacking  in  con¬ 
clusiveness. 

III.  MARGINAL  UTILITY  VS.  COST. 

We  now  come  to  the  main  question  raised  by  the  Austrian 
economists — the  question  how  the  exchange  value  of  com¬ 
modities  is  fixed.  The  classical  theory  attributes  the  normal 
control  of  value  to  comparative  cost ;  the  Austrian  theory 
attributes  this  function  to  the  principle  of  marginal  utility. 
The  new  theory  does  not,  indeed,  propose  to  drop  the  action 
of  cost  out  of  account  entirely  ;  but  what  its  advocates  call 
cost  is,  as  we  have  seen,  nothing  but  a  form  of  utility. 
They,  of  course,  see  clearly  that  there  cannot  be  two  inde¬ 
pendent  regulators  of  value,  for  the  two  could  but  rarely 
coincide  in  fixing  the  same  value  for  things.  As  a  way  out 
of  the  difficulty,  they  have,  in  fact,  undertaken  to  show  that 
marginal  utility  governs  the  cost  as  well  as  the  value  of  com¬ 
modities.  That  undertaking  can  hardly  be  called  successful ; 

[365] 


30 


Annals  of  the  American  Academy. 


and  until  it  has  been  successfully  carried  out,  the  adherents 
of  the  classical  theory  might  well  rest  their  defence  on  this 
point  alone.  But  it  is  due  to  Dr.  von  Wieser  that  we  should 
examine  briefly  the  precise  function  of  marginal  utility  in 
the  exchange  of  products.  That  it  has  a  function  has  been 
made  abundantly  clear,  and  the  Austrian  economists  have 
done  a  highly  valuable  service  in  calling  attention  to  it. 
Their  only  mistake  has  been  the  natural  one  of  claiming  too 
much  for  the  principle.  This  mistake  they  made  almost 
inevitable  by  their  mode  of  treating  exchange  of  products. 
They  treat  exchange  as  an  independent  subject — as  a  trans¬ 
action  entered  into  for  its  own  sake.  They  have  chosen  to 
make  no  account  of  the  fact  that  economic  exchange  is 
simply  a  stage,  the  closing  stage,  in  production  by  division 
of  labor.  Cutting  themselves  off  in  this  way  from  the  true 
explanation  of  the  origin  and  motives  of  exchange,  they 
have  been  obliged  to  invent  for  it  a  cause  and  a  motive  which 
may  appear  in  the  act  of  exchange  itself.  This  they  try  to 
do  by  a  comparison  of  the  utilities  of  the  things  exchanged 
to  the  two  exchangers.  Each  parts  with  a  thing  of  lower 
utility  to  him  than  the  thing  he  receives ;  the  difference  is 
his  “profit”  by  the  transaction,  and  constitutes  his  motive 
for  making  it.  How  it  happens  that  men  constantly  find 
themselves  in  possession  of  things  of  lower  utility  to  them 
than  the  things  their  neighbors  have,  would  seem  to  be  a 
question  calling  for  treatment,  as  the  very  basis  of  any  theory 
of  exchange.  Any  discussion  of  it  must  disclose  the  fact  that 
the  gain  of  exchange  is  not  to  be  found  in  exchange  itself, 
but  in  the  method  of  production  which  makes  exchange 
necessary.  The  gain  is  in  the  increased  productiveness  that 
comes  by  division  of  labor.  It  is  the  gain  of  having  more 
commodities  for  our  labor,  not  of  having  commodities  of 
higher  utility  to  us.  That  the  act  of  exchange  does  result  in 
giving  each  producer  an  article  of  higher  utility  to  him  than 
his  own  product  is  undoubtedly  true  ;  but  that  is  no  real 
explanation  of  the  case,  because  it  asks  us  to  take  the 

[366] 


The  Austrian  Theory  oe  Value.  31 

subordinate,  incidental  circumstance  instead  of  the  larger  and 
more  fundamental  principle  that  governs  the  whole  proceed¬ 
ing.  Exchange  can  never  be  properly  treated  except  as  a 
part  of  the  method  of  production  that  gives  rise  to  it.  Once 
forget  that  the  nailmaker  has  made  his  stock  of  nails  with 
no  other  thought  than  that  of  getting  a  general  assortment 
of  useful  commodities  in  exchange  for  vthem,  and  you  are 
on  a  wrong  ground  altogether.  Once  off  the  true  ground 
of  his  action,  you  are  in  danger  of  inventing  wholly  un¬ 
real  motives  for  him,  and  of  adopting  wholly  untenable 
doctrines  as  to  the  way  in  which  the  terms  of  exchange  are 
settled. 

Precisely  this  error  I  think  the  Austrian  economists  have 
fallen  into.  They  practically  ignore  production  in  their 
treatment  of  exchange.  Dr.  von  Wieser,  in  his  treatise  on 
‘  ‘  Natural  V alue,  ’  ’  expressly  states  that  his  purpose  is  to  discuss 
value  as  it  would  present  itself  if  a  highly  developed  com¬ 
munity  existed  without  exchange  and  without  price,  (p.  37.) 
For  the  purposes  of  his  treatment  he  assumes,  provisionally 
of  course,  that  the  supply  of  each  article  exists  without  pro¬ 
duction  (p.  24,  note) .  By  ignoring  production  as  the  source 
of  supply,  he  easily  arrives  at  a  theory  which  ignores  cost 
of  production  as  the  regulator  of  value.  Now,  I  have 
nothing  but  admiration  for  the  patient  skill  with  which  the 
Austrian  economists  have  worked  out  the  play  of  human 
feelings  in  connection  with  the  acquisition  of  material  com¬ 
modities.  The  principle  of  marginal  utility  is  undoubtedly 
a  most  important  contribution  to  economic  theory.  But  it 
seems  entirely  clear  to  me  that  its  authors  have  been  misled 
as  to  the  precise  scope  of  its  action.  They  attribute  to  it 
the  power  of  controlling  and  determining  exchange  value, 
to  the  practical  supersedence  of  the  traditional  law  of  cost. 
In  my  opinion,  its  true  function  is  not  at  all  to  fix  exchange 
value,  but  to  limit  the  demand  for  each  commodity  at  the 
value  fixed  by  the  cost  of  producing  it.  A  few  considera¬ 
tions  will  serve  to  make  this  plain. 

[367] 


32 


Annals  of  the  American  Academy. 


In  the  first  place  the  principle  of  marginal  utility  is  simply 
that  our  subjective  valuation  of  each  commodity,  or  rather 
of  each  additional  unit  of  it,  grows  less  as  our  supply  of  the 
commodity  is  increased.  If  a  man  has  but  a  single  coat,  he 
necessarily  sets  a  high  value  on  it ;  to  lose  it  would  be  to  lose 
a  great  deal  of  comfort.  Give  him  a  second  coat ;  this, 
though  a  highly-prized  addition  to  his  possessions,  is  not  of  as 
great  utility  to  him  as  it  would  be  if  he  had  no  other  ;  the 
loss  of  it  would  not  be  so  great  a  loss  of  comfort.  A  third 
coat  would  have  still  less  utility  for  him  than  the  second  ; 
and  so  on.  By  successive  additions  to  his  supply  of  coats 
you  would  finally  reach  a  point  at  which  a  coat  more  or  a 
coat  less  would  be  a  matter  of  indifference  to  him.  This  is 
the  point  of  satietjL  There  is  thus  between  the  famine,  or 
maximum  valuation  and  the  satiety,  or  zero  valuation,  a 
descending  scale  of  utility  for  each  commodity — each  point 
in  the  scale  corresponding  to  some  determinate  supply  of  the 
article.  The  application  of  the  utility-scale  to  the  purchase 
of  commodities  is,  in  some  respects,  entirely  obvious.  The 
man  who  already  has  two  coats  will  give  so  much,  and  only 
so  much,  for  a  third  ;  if  he  has  already  three  coats,  he  will 
not  buy  a  fourth  unless  the  price  falls  within  his  estimate  of 
the  utility  to  him  of  having  a  fourth  coat.  And  so  of  the 
fifth  and  the  sixth  and  all  higher  numbers.  For  the  sake  of 
definiteness,  let  us  assume  that  all  men  agree  in  estimating 
the  utility  of  coats  as  follows  : 


First, 

.  .  .  .  .  .  1 00 

Second, 

•  .  .  •  •  .IQ 

Third, 

•  •  •  •  •  •  13 

Fourth, 

..«•«.  3 

Fifth, 

■2 

•  •••••  ** 

Sixth, 

•••••  0.5 

Seventh, 

•  •••••  O  •  O 

Now,  obviously  there  is  nothing  in  this  scale,  in  and  of 
itself,  to  tell  us  anything  as  to  the  actual  price  of  coats.  It 

[368] 


The  Austrian  Theory  oe  Vaeue.  33 

tells  only  that  the  price  cannot  exceed  $100.  In  order  to 
establish  a  particular  price,  we  must  know  how  many  coats 
there  are  to  be  sold.  If  there  are  so  many  in  the  market 
that,  in  order  to  sell  all,  every  man  must  be  induced  to  buy 
three,  then  we  can  say  at  once  that  the  price  must  be  not 
above  thirteen  dollars.  If  every  man  must  be  induced  to 
buy  four,  the  price  cannot  exceed  eight  dollars.  But  observe 
the  “if.”  If  we  could  assume,  with  Dr.  von  Wieser,  that 
the  supply  of  commodities  came  to  us  without  production, 
we  should  have  no  hesitation  in  accepting  his  theory  of  value. 
As,  however,  there  is  no  way  by  which  men  can  get  com¬ 
modities  except  by  producing  them,  it  is  obvious  that  pro¬ 
duction  controls  the  supply.  And  in  order  that  coats  shall 
be  forthcoming  to  meet  the  calls  of  purchasers,  it  is  neces¬ 
sary  that  some  men  be  induced  to  produce  them. 

What,  then,  determines  whether  each  wearer  of  coats  shall 
be  able  to  obtain  only  one  coat  a  year  at  $100,  or  two  coats 
at  nineteen  dollars  each,  or  four  coats  at  eight  dollars  each. 
Obviously,  nothing  but  the  greater  or  less  difficulty  of  pre¬ 
vailing  on  other  men  to  produce  them  for  him.  This,  again, 
will  depend  on  the  estimate  men  put  upon  the  whole  task  of 
producing  coats.  In  other  words,  it  will  depend  on  what  we 
call  cost  of  production. 

Division  of  labor  gives  rise  to  most  of  the  puzzles  and 
misconceptions  with  which  economic  theory  has  to  deal.  It 
so  complicates  every  question,  that  even  trained  economists 
may  readily  lose  the  true  bearing  of  things.  In  this  matter 
of  marginal  utility,  the  whole  difficulty  in  perceiving  the 
exact  function  it  performs,  grows  out  of  division  of  labor. 
If  every  man  produced  each  article  directly  for  the  supply 
of  his  own  wants,  I  think  the  whole  matter  would  be  clear 
to  everybody.  Such  a  producer  would  constantly  have  to 
answer  for  himself  the  question — How  much  of  this  thing 
shall  I  produce  ?  I11  answering  it,  he  would  have  a  rather 

complicated  set  of  considerations  to  base  his  decision  upon. 
He  would  have  in  mind  in  the  first  place,  the  limits  of  his 

[369] 


34  Annals  of  the  American  Academy. 

whole  productive  capacity  and  the  extent  and  character  of  his 
needs.  He  would  wish  to  apportion  his  labors  among  the 
various  sorts  of  production  in  such  a  way  as  to  yield  him  the 
largest  possible  satisfaction — the  maximum  of  utility.  In 
deciding  how  much  of  each  commodity  to  produce,  he  would 
have  of  course  to  balance  its  utility  against  that  of  the  other 
possible  commodities,  measure  for  measure.  But  that  would 
not  be  all.  He  w7ould  also  have  to  balance  its  cost,  measure 
for  measure,  against  that  of  the  other  commodities.  Or,  if  a 
different  way  of  expressing  it  be  preferred,  he  would  have 
to  consider  not  merely  the  utility  of  each  commodity,  but  the 
utility  in  comparison  with  the  cost  :  the  question  being 
whether,  for  the  necessary  cost  of  it,  the  given  commodity 
offers  on  the  whole  the  best  return.  He  would  give  up 
producing  it  and  turn  to  something  else,  when  the  point  was 
reached  at  which  he  should  say  to  himself,  “  Things  being  as 
they  are,  I  can  do  better  for  myself  by  now  devoting  my 
labor  to  that  other  article.  By  the  same  amount  of  trouble 
as  would  be  required  for  producing  another  measure  of  this, 
I  could  produce  so  and  so  many  measures  of  that  other  ;  and 
this,  as  I  am  situated,  would  be  better  for  me.”  The  point 
I  wish  to  insist  on,  is  the  part  necessarily  played  by  cost  in 
the  forming  of  this  decision.  Without  the  consideration  of 
cost,  in  some  form,  there  is  really  no  basis  for  a  decision  at 
all ;  for,  were  it  not  for  the  obstruction  of  cost,  everybody 
would  carry  his  supply  of  every  commodity  to  the  point  of 
satiety — in  which  case  all  considerations  of  value  and  all 
theories  of  value  would  alike  disappear. 

Those  who  find  diagrams  helpful  for  illustrating  a  matter 
of  this  sort,  may  perhaps  get  assistance  from  the  one  annexed. 
It  is  intended  to  illustrate  the  relations  of  cost  and  marginal 
utility  in  the  case  of  three  commodities — two  of  them  neces¬ 
saries  and  the  third  in  the  nature  of  a  luxury.  Since  our 
estimate  of  the  utility  of  each  additional  unit  of  any  commod¬ 
ity  is  less  than  that  of  the  previous  units,  we  may  represent 
the  utility  of  successive  units  by  a  descending  curve.  Cost, 

[37°] 


The  Austrian  Theory  of  Vaeue.  35 

on  the  other  hand,  being  a  constant  quantity,  may  be  repre¬ 
sented  by  a  horizontal  line.  The  point  of  marginal  utility 
for  the  given  conditions  is  found  where  the  utility  curve 
intersects  the  line  of  cost.  Flour  and  coats  being  necessary 
articles,  the  utility  of  the  first  coat  and  the  first  barrel  of 
flour  cannot  well  be  expressed.  The  scale  of  numbers  is 


primarily  for  costs  :  the  unit  of  cost  being  a  definite  amount 
ot  labor  and  waiting  :  not  in  the  sense  that  the  composition 
of  the  unit  is  identical  in  all  cases,  but  that,  in  point  of 
burdensomeness,  each  is  equivalent  to  every  other.  The 
same  scale,  read  downward,  may  also  answer  for  the  units 

[371] 


36 


Annals  of  the  American  Academy. 


of  utility  ;  but  it  must  be  remembered  of  course,  that  for 
this  purpose,  they  have  a  wholly  different  signification. 

Suppose,  now,  that  we  have  the  case  of  a  man  who  has 
seventy-five  units  of  labor  and  waiting  to  be  applied  to  the 
production  of  coats,  flour  and  beer  ;  also  let  us  assume  that 
each  coat  has  a  cost  of  ten  units,  the  barrel  of  flour  six  units 
and  the  keg  of  beer  three  units.  Let  us  further  suppose 
that  the  curves  of  our  diagram  represent  truly  his  estimate 
of  the  utility  of  successive  units  of  the  three  commodities. 
From  these  data,  we  are  enabled  to  predict  that  he  will  pro¬ 
duce  for  himself  three  coats,  five  barrels  of  flour  and  five 
kegs  of  beer ;  for  by  this  distribution  of  his  productive 
power,  he  will,  on  our  assumptions,  produce  a  greater  total 
utility  for  himself,  according  to  his  own  estimate  of  the 
respective  utilities,  than  he  could  by  any  other  selection.* 

Two  things  are  to  be  noted  in  this  example  for  their 
bearing  on  our  main  problem.  In  the  first  place,  it  is 
obvious  that  the  man’s  estimate  of  the  utility  of  the  suc¬ 
cessive  units  has  not  the  least  effect  on  the  terms  of  obtaining 
them  :  all  the  units  of  each  commodity  cost  him  alike. 
Secondly,  and  I  may  say  consequently,  his  low  estimate  of 
the  utility  of  the  last  barrel  of  flour,  or  of  the  last  keg  of 


*  This  is  a  mere  matter  of  arithmetic.  Using  the  data  of  the  diagram,  and 
adding  together  the  figures  indicating  the  utility  and  the  cost  of  the  successive 
units  of  commodity,  we  have  the  following  results.  No  other  selection  yields  so 
large  a  sum  of  utility  for  the  same  cost.  The  dotted  prolongation  of  the  utility 
curves  gives  the  data  for  testing  this  proposition. 

Utility. 

Coats,  ist, . ? 

2d,  19 

3d,  13 

Flour,  ist  bbl., . ? 

2d  “  25 

3d  “  23 

4th  “  20 

5th  "  14 

Beer,  ist  keg, . 15 


2d 

3d 

4th 

5th 


10 

7 

5 

4 


Cost. 

10 

10 

10 

6 

6 

6 

6 

6 

3 

3 

3 

3 

3 


155+  75 


Total, 


[372] 


The;  Austrian  Theory  of  Vaeue. 


37 


beer,  has  not  the  least  effect  on  the  terms  he  has  to  submit 
to  in  order  to  get  it.  The  only  things  determined  by  his 
sense  of  utility  are,  first,  that  he  desires  this  last  unit  of  each 
commodity  sufficiently  to  be  willing  to  submit  to  the  neces¬ 
sary  cost  in  order  to  add  it  to  his  supply;  and  secondly,  that 
he  does  not  sufficiently  desire  a  further  unit  of  either  to  be 
willing  to  give  the  necessary  cost  for  it.  That  is  to  say,  the 
effect,  the  only  effect,  of  marginal  utility,  is  to  fix  the  pro¬ 
portional  quantity  of  each  commodity  to  be  produced. 

Now,  carrying  over  these  elementary  ideas  into  our 
existing  industrial  S3^stem,  we  may  get  some  help  from  them 
in  discerning  the  precise  office  of  marginal  utility  in  connection 
with  exchange  of  products.  It  will  be  admitted,  I  suppose, 
that  division  of  labor  has  no  necessary  effect  on  the  in¬ 
dividual  producer’s  estimate  of  the  utility  of  commodities. 
It  increases  enormously  the  productiveness  of  labor :  gives 
each  man  a  vastly  greater  sum  of  utility  in  return  for  a  given 
outlay  of  labor  and  waiting.  But  I  see  no  reason  to  suppose 
that  each  man’s  choice  of  commodities  is  at  all  different, 
under  division  of  labor,  from  what  it  would  be  if  he  were 
able  to  produce  all  things  directly  for  himself,  in  the  same 
quantities  as  he  can  now  procure  them  by  exchange  with 
other  producers.  The  new  element  in  the  case  affects  only 
the  amount  and  the  form  of  the  cost  to  him  of  the  com¬ 
modities  he  seeks  to  obtain.  Cost  is  indefinitely  lessened 
for  him.  Secondly,  the  cost  on  which  his  sense  of  marginal 
utility  is  to  play,  is  no  longer  the  very  labor  and  waiting 
that  produce  the  commodities  he  uses  ;  for  they  are  pro¬ 
duced  by  others.  It  is  rather  the  labor  and  waiting  he  must 
bestow  in  producing  the  quantity  of  his  own  commodity  he 
gives  in  exchange  for  them.  Therefore,  the  cost  of  produc¬ 
ing  his  own  product  being  given,  the  cost  to  him  of  the 
things  he  buys  depends  on  the  terms  of  the  exchange  ;  in 
other  words,  it  is  a  question  of  exchange  value.  The  cost, 
then,  which  must  figure  in  our  diagram,  is  no  longer  the 
direct  and  proper  cost  of  producing  flour  and  coats  and  beer, 

[373] 


33 


Annals  of  the  American  Academy. 


but  the  cost  of  acquisition  of  these  commodities  to  the 
purchaser.*  This  being  merely  another  word  for  the 
exchange  value  of  these  commodities,  viewed  from  the 
purchaser’s  standpoint,  it  follows  that  their  exchange  value 
now  takes  the  place  of  direct  cost  in  determining  the  position 
of  the  refusal-point  in  the  scale  of  marginal  utility,  the 
point,  that  is  to  say,  at  which  the  buyer  says  to  himself, 

‘  ‘  I  can  do  better,  as  values  stand,  by  buying  other  things 
instead  of  buying  any  more  of  this  one.” 

This  is  a  result  of  the  highest  importance  for  our  main 
question.  It  goes  to  indicate  a  wholly  different  relation 
between  marginal  utility  and  value  from  that  which  Dr.  von 
Wieser  undertakes  to  establish.  So  far  from  being  able  to 
set  the  exchange  value  of  things  by  its  own  independent 
action,  marginal  utility  in  any  given  case,  must  rely  on  the 
exchange  value  for  its  own  determination  of  anything.  Cost 
in  some  form  is  necessary  as  a  basis  for  the  sense  of  utility 
to  operate  on,  in  order  to  evolve  a  refusal-point  in  the  demand 
for  each  commodity.  Otherwise,  as  already  remarked,  every¬ 
body  would  push  his  acquisition  of  every  commodity  to  the 
limit  of  satiety.  The  Austrian  economists  seem  to  me  to 
ignore  too  much  the  fact  that  value  in  exchange  means,  for 
the  purchaser,  cost  as  well  as  utility.  They  are  so  preoccu¬ 
pied  with  subjective  value,  or  utility,  that  they  have  too  little 
thought  of  this  other  side  of  the  case.  In  exchange,  and 
from  the  standpoint  of  the  buyer,  value  is  synonymous  with 
cost ;  it  holds  to  the  buyer  the  same  relation  that  cost  of  pro¬ 
duction  does  to  the  producer.  This  is,  at  bottom,  the  reason 
why  exchange  value  and  cost  of  production  are  so  closely 
allied. 

The  normal  operation  of  the  principle  of  marginal  utility 
in  exchange  would  seem  to  be  that  each  producer  should  offer 
his  own  product,  on  the  basis  of  equal  cost  for  equal  cost,  for 
such  quantities  of  the  various  other  commodities  as  he  would 

*  On  the  assumption,  of  course,  that  we  are  not  dealing  with  the  case  of  a  man 
who  produces  one  of  these  articles. 


[374] 


The  Austrian  Theory  of  Vaeue. 


39 


have  wished  to  produce  directly  for  himself,  if  that  method 
of  production  were  open  to  him.  He  knows  that  his  estimate 
of  the  utility  of  each  has  no  effect  on  the  cost  of  obtaining 
it.  But,  knowing  the  natural  cost,  his  sense  of  utility 
prompts  him  to  have  a  certain  quantity  at  that  cost,  through 
exchange. 

Suppose  now,  that  our  diagram  represents  the  case  of  a 
brickmaker,  who  wishes  to  obtain  flour,  coats  and  beer.  The 
question  we  have  to  answer  is  this  :  Why  is  it  ordinarily 
true  that  the  man  can  obtain  a  keg  of  beer  in  exchange  for 
the  quantity  of  bricks  representing  three  units  of  cost,  the 
barrel  of  flour  for  the  quantity  representing  six  units,  and 
the  coats  for  the  quantity  representing  ten  units  ?  The  classi¬ 
cal  theory  answers  that  it  is  because  the  natural  effort  of  men 
to  get  the  best  returns  they  can  for  their  labor  and  waiting, 
tends  to  keep  the  returns  for  equivalent  quantities  of  labor 
and  waiting  about  equal.  The  Austrian  theory  avers  that  it 
is  because  the  marginal  utility  of  each  commodity  makes 
men  willing  to  take,  at  these  values,  the  whole  supply  of  each 
commodity  offering  for  sale.  If  the  value  were  set  a  little 
higher  some  part  of  the  supply  would  be  unsold  ;  if  lower, 
some  part  of  the  demand  would  be  unsatisfied. 

But  this  latter  answer  obviously  leaves  altogether  out  of 
sight  the  vital  question  how  comes  it  to  pass  that  the  supply 
of  each  commodity  is  so  adjusted  in  amount  that  the  whole 
product  is  ordinarily  taken  at  the  value  that  corresponds  to 
cost?  It  is  clearly  the  adjustment  of  the  supply  that  makes 
it  possible  for  the  exchange  to  proceed  on  that  basis.  If  we 
take  the  proper  adjustment  of  supply  for  granted,  we  take 
the  whole  matter  for  granted  ;  for  if  the  proportional  supply 
were  different,  a  different  point  in  the  scale  of  marginal 
utility  would  come  into  play  for  each  commodity,  and 
exchange  values  would  cease  to  correspond  with  cost.  Fur¬ 
ther,  these  new  values,  so  far  from  tending  to  be  corrected 
by  the  action  of  marginal  utility,  would  simply  be  in  accord¬ 
ance  with  that  principle,  and,  so  far  as  it  is  concerned,  might 

[375] 


40  Annals  of  thk  American  Academy. 

remain  permanently  the  exchanging  ratios  of  the  commodi¬ 
ties.  The  corrective  which  restores  the  terms  of  exchange 
to  the  basis  of  cost,  must  surely  proceed  from  the  side  of 
cost.  The  readjustment  of  values  has  to  be  preceded  by  a 
readjustment  of  supply;  and,  at  the  sources  of  supply  not 
marginal  utility,  but  cost,  makes  itself  felt — impelling  men, 
through  self-interest,  to  a  course  of  action  that  tends  to  bring 
values  into  such  relations  with  each  other  as  to  equalize  the 
rewards  of  equal  quantities  of  labor  and  waiting. 

Now,  if  the  contention  of  the  Austrian  economists  were 
merely  that  in  this  corrective  process,  marginal  utility  plays 
a  part ;  if  their  doctrine  were  simply  that  men  naturally 
strive  to  obtain  the  greatest  possible  sum  of  utility  in  return 
for  their  labor  and  waiting,  and  that,  in  determining  the 
direction  in  which  the  maximum  of  utility  is  to  be  found, 
the  principle  of  marginal  utility  is  decisive,  there  could  be  no 
hesitation  in  agreeing  with  them.  That  would  not  be  to 
claim  for  marginal  utility  the  power  of  regulating  exchange 
values.  It  would  only  be  an  assertion  of  the  principle  that, 
given  the  terms  on  which  commodities  may  be  obtained, 
marginal  utility  indicates  the  relative  proportions  of  the 
various  commodities  that  would  bring  the  highest  sum  of 
utility  in  return  for  a  given  quantity  of  labor  and  waiting. 
The  new  doctrine  seems  to  go  far  beyond  this,  and  to  assert 
that  marginal  utility  not  only  settles  how  much  men  want  of 
the  several  commodities  on  any  given  terms,  but  also  has  the 
power  of  fixing'  the  terms  themselves,  on  which  each  com¬ 
modity  may  ordinarily  be  obtained.  It  seems  to  aver  that  the 
fundamental  reason  wThy  the  normal  exchange  value  of  each 
commodity  is  what  it  is,  must  be  found,  not  in  an}"  comparison 
of  costs,  but  in  the  fact  that  there  is  ordinarily  a  last  buyer 
who  is  just  willing  to  give  the  normal  price  for  the  last  unit 
of  the  normal  supply.  So  far  as  it  does  involve  this  doctrine, 
it  seems  to  me  to  be  at  variance  with  sound  reason. 

The  classical  theory  holds  that  utility  is  an  essential  con¬ 
dition  of  value,  but  that  neither  the  utility  of  the  first  nor 

[376] 


The  Austrian  Theory  of  Vaeue.  41 

of  the  last  unit  of  supply  fixes  the  exchange  value.  The 
last  unit,  like  the  first,  must  indeed  have  a  utility  great 
enough  to  counterbalance  the  dis-utility  of  the  necessary 
cost ;  otherwise  it  would  not  be  produced.  The  fact  that,  in 
the  case  of  the  last  unit,  utility  comes  to  the  level  of  cost, 
does  not  affect  the  terms  on  which  the  producer  can  obtain 
this  or  any  other  unit  from  nature’s  sources  of  supply. 
Neither,  therefore,  can  it  affect  the  terms  on  which  one  man 
may  induce  another  man  to  produce  this  or  any  other  unit 
for  him.  The  sole  consequence  of  the  coincidence  of  utility 
with  cost,  in  the  case  of  the  last  unit,  is  to  make  it  the  last. 
Recurring  to  our  diagram,  the  position  of  the  classical  econo¬ 
mists  is  made  plain  by  observing  that  so  long  as  the  costs 
of  the  three  articles  remain  as  given,  no  change  in  the 
curves  of  utility  wTill  have  any  permanent  effect  on  the 
exchange  values.  Even  if  the  utility  curves  were  inter¬ 
changed,  the  only  lasting  effect  would  be  to  alter  the  propor¬ 
tional  production  of  the  three  commodities  :  one  coat  would 
still  be  equal  in  value  to  1^  bbls.  of  flour,  and  3  yi  kegs  of 
beer.  But,  each  article  keeping  its  own  curve  of  utility,  let 
the  lines  of  cost  be  interchanged — coats  taking  the  cost  of 
flour,  flour  that  of  beer,  and  beer  that  of  coats — and  we 
cannot  doubt  that  exchange  value  will  be  interchanged  also. 
Coats  will  fall  to  the  value  flour  had  before,  flour  to  the  value 
beer  had  before,  and  beer  will  rise  to  the  value  coats  had 
before.  These  things  being  so,  how  shall  we  avoid  the 
conclusion  that  cost,  not  marginal  utility,  regulates  the 
exchange  value  of  commodities  ? 

S.  M.  Mac  vane. 

Harvard  University. 


[377] 


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